I don't like where HTML5 is going if people like you will randomly store 5MB of data on my hard disk...
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BlindyJun 21 '11 at 20:05

It made that number big for testing purposes. I will definitely lower that number. I think that the plan for the future is that if an app is trying to use storage in your computer it will first ask for permission from the user to do so. But right now, you can specify "unlimitedStorage" in the manifest and you can store as much data as you want. :)
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RobJun 21 '11 at 20:13

I had been wondering the same thing and had a look at finding an answer.
From what I can tell you have to convert the raw string you get from an atob to an unit8array and then you can append it to a blob.
Here's an example that converts an image to a canvas and then the data from the canvas to a blob and then the third images src is set to the uri of the blob....you should be able to add the fs stuff from there....http://jsfiddle.net/PAEz/XfDUS/
..sorry to not put the code here, but to be honest I couldnt figure out how to ;) and anyways, JSFiddle is a nice way to play with it.